Working Paper: CEPR ID: DP7090
Authors: Masayuki Hirukawa; Masako Ueda
Abstract: Policy makers typically interpret positive relations between venture capital investments and innovations as an evidence that venture capital investments stimulate innovation ('VC-first hypothesis'). This interpretation is, however, one-sided because there may be a reverse causality that innovations induce venture capital investments ('innovation-first hypothesis'): an arrival of new technology increases demands for venture capital by driving new firm startups. We analyze this causality issue of venture capital investments and innovation in the US manufacturing industry using both total factor productivity (TFP) growth and patent counts as measures of innovation. Using a panel AR regression as well as industry-by-industry AR regressions, we find that TFP growth is often positively and significantly related with future VC investment, which is consistent with the innovation-first hypothesis. We find little evidence that supports the VC-first hypothesis. More surprisingly, one-year lagged VC investments are often negatively and significantly related with both TFP growth and patent counts.
Keywords: innovation; venture capital
JEL Codes: D24; G24; O31; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TFP growth (O49) | future VC investments (G24) |
| two-year lagged first-round VC investments (D25) | TFP growth (O49) |
| one-year lagged VC investments (G31) | TFP growth (O49) |
| one-year lagged VC investments (G31) | patent counts (O34) |